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Birds on branch

Early birds

19 November 2014

The secret of successful saving and investing for children is to start early.

The cost of raising children has often been a pressure point for family finances, and the low wage growth, government austerity and ultra-low interest rates of recent years have made many budgets even tighter. The Centre for Economic and Business Research recently quantified the cost of bringing up a child from birth to the age of 21 as in excess of £227,000 compared with more than £140,000 when the research started in 2003. Clearly, bringing up a family has become more of an expense over the last decade, as has the cost of living for anyone making their early steps in adult life.

Faced with these rising expenses and dwindling returns from savings, many parents may well baulk at or be unable to fund the commitment of building a nest egg for their offspring. Some may wish to encourage their children to learn good savings habits for adult life. (Commendably, the Church of England last week unveiled an innovative scheme to educate children to manage money through the creation of credit union-run savings clubs at primary schools.) But, many want to help their children directly by saving on their behalf.

Clearly, if one’s goal is to help a young child save for a distant goal – such as buying his or her first home or paying for further education or training – then the earlier these savings are started the better. The benefits of a long-term approach to investment are time-tested and the principle is very simple: the longer the investment has to mature the greater the benefit will be from the year-on-year compound growth of reinvested returns.

There are a number of government schemes to save for children. The tax-friendly Junior Individual Savings Account (JISA), which marked its third anniversary at the start of the month, is open for children aged 17 and under. Children born between the 1 September 2002 and 2 January 2011 qualify for a Child Trust Fund (CTF). Up to £4,000 a year can be paid into whichever of these two schemes a child is eligible for, and the annual limits rise in line with consumer prices. About six and a half million children have benefitted from these accounts, which the child can access when he or she reaches 18 (source: HM Treasury, January 2014). The government plans to merge the two schemes by April 2015.

Minor benefits

Less well-known is that children can have a pension fund as soon as they are born – and setting one up can bring significant tax advantages. More than 10,000 children already have pension plans in place, according to HM Revenue & Customs. Contributions up to the maximum of £2,880 a year are automatically grossed up by the state to take account of tax at 20%, giving a maximum annual investment of £3,600. Even a few years of contributions can build a substantial pot. A £3,600 annual contribution for just the first five years of a child’s life would create a pot worth £121,000 by the time he/she turned 60, assuming 3% net growth per year.

Just as with pensions for adults, pension pots for minors grow in a tax-advantaged environment. In common with JISAs or CTFs, anyone can pay into the pension – parents, grandparents, godparents, friends or other family members. Saving this way may also help mitigate an Inheritance Tax (IHT) liability as payments from grandparents, for example, may be covered by the annual £3,000 IHT allowance, or the exemption for payments made out of income.

Retirement gift

Under current legislation, savers can gain access to their pension fund at 55 – although this will change to 57 in 2028 and from then on it will be set at 10 years below the State Pension age. But the benefits can be felt long before that. Saving into a pension for your children will ease the pressure on them to start their retirement planning while they are just starting out in their careers and facing the costs of starting a family and buying their first home.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

An investment placed into funds (equities) would not have the security of capital associated with a deposit account with a bank or building society.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

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